One Weird Trick to Restore Solvency to State Pensions

How many times have you followed a link that began with the “One Weird Trick” clickbait meme?

Hopefully, a lot of state government elected officials and bureaucrats do this, which is why the title of this article is “One Weird Trick to Restore Solvency to State Pensions.” For the states that are so far behind in funding the pension plans for state and local government employees that they have almost no hope of ever making up the gap, such as Illinois and New Jersey, where the gloomy outlook has become even darker, there actually is hope from a highly unlikely source.

That highly unlikely source is the state that CNBC just defined as being the worst for business in 2016: Rhode Island. And the amazing thing is that even with being such a bad business environment by CNBC’s metrics, the state’s leaders have managed to effect a dramatic turnaround toward restoring the solvency of the state’s public pensions, using, you guessed it, one weird trick!

To be honest, it’s really not so weird, and it involves two basic steps. The first thing they’ve done is to move away from traditional defined benefit pension plans for government employees, the kind that guarantees that state government employees will get a steady pensions check from the state government after they retire, no matter if the state’s pension fund has the money to pay it or needs to make up the difference by raiding the state’s Treasury, even if that means taking money away from things that state residents thought they were really paying for with their state taxes, like schools.

The second step is to put state government employees onto defined contribution pension plans, much like the kind of 401K-type plans that are common in the private sector, where the state government instead guarantees that it will match a percentage of the money that their employees sock away for retirement into the plan out of their regular income.

The numbers for Rhode Island’s pension turnaround are dramatic.

Rhode Island ranks 45th in Economy in our study this year. State GDP grew just 1.7 percent last year, to around $50 billion. The state has a long history of financial woes, including a pension that was underfunded by nearly $9 billion as recently as 2011.

But by the end of last year, those unfunded liabilities had been cut nearly in half to around $4.8 billion, according to the state treasurer’s office. Raimondo points to sweeping reforms—she was state treasurer before she was elected governor—including switching from defined-benefit retirement plans to defined contribution plans.

That’s amazing progress from a state whose economy isn’t firing on all cylinders and hasn’t been for years. Governor Gina Raimondo (D), deserves a lot of credit for taking on the state’s pubic employee unions and making the transition to a more sustainable pension funding system that ensures that state government employees can have reasonable pensions without overly burdening the state’s citizens.

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